Workers in ‘Contractor’ Limbo at Risk in Covid-19 Jobless Wave

The coming tsunami of unemployment claims driven by the Covid-19 pandemic will make it harder for workers who claim they’re misclassified as contractors to get the legal help often needed to prove they’re eligible for unemployment benefits, legal observers said.

Most states use worker-friendly legal standards to establish employee status for unemployment insurance benefits. But the way claims are processed means workers frequently have to appeal initial agency denials to get those standards applied, observers said. That can make it difficult for “pro se” claimants who are representing themselves without counsel.

“The system is supposed to be designed to be pro se, but unfortunately it’s more complicated than people think,” said Rachael Kohl, a University of Michigan law professor who leads the school’s Workers’ Rights Clinic. “Misclassification is already a legally difficult issue for anyone to understand. It’s not an issue people are equipped to handle pro se.”

State unemployment insurance systems are on track for an unprecedented surge of claims resulting from businesses shutting down in response to the novel coronavirus. That coming wave will likely overwhelm legal aid providers, suggesting that potentially misclassified workers could be disproportionately hurt as unemployment insurance systems are pushed to—and past—their respective breaking points.

Initial unemployment insurance claims spiked by 33 percent in the last week, to 281,000, the Labor Department said March 19. But that could pale in comparison to the next round. Goldman Sachs, for example, predicted March 19 that the next weekly report will show 2.25 million new filers.

“This is going to be a stress test like no other for these UI systems,” said Heidi Shierholz, senior economist and director of policy at the Economic Policy Institute. “Even the perfect system is not set up for this. There’s going to be a lot of people falling through the cracks.”

UI Claims Process

Each state administers its own unemployment insurance system. Generally, state agencies make initial assessments based on financial eligibility by looking at workers’ wages, legal observers said. Agency staffers can also reach out to workers and companies with questions at this stage of the process.

Most likely an agency will deem a worker ineligible if his or her pay was entered into a state’s tracking system through 1099 tax forms used for independent contractors, said Julia Simon-Mishel, the supervising attorney for Philadelphia Legal Assistance’s unemployment compensation division. That triggers the opportunity for an initial hearing to review a claimant’s eligibility, she said.

“We’ve been very successful getting workers to be considered employees in these hearings,” Simon-Mishel said. “But it can be a difficult process when a worker is unrepresented.”

State UI systems typically have several levels of appellate review. Agency determinations can be challenged to administrative law judges. Those rulings can be appealed to a review board, which issues decisions that can be challenged further in state court.

Legal Tests

Workers claiming misclassification have some advantages. Companies have the burden of proving that workers aren’t employees. In most states, the legal standard for employment status for UI claims is more worker-friendly than the thresholds used for other workplace laws.

Thirty-seven states used some variation of the “ABC test” to determine employment status for unemployment insurance as of 2018, according to the Labor Department. That three-part test examines how much the company controlled the worker, whether the worker performed a service within the normal course of the company’s business, and if the worker had an independently established role or business for themselves.

Some of those 37 states only use parts of the ABC test to determine employment status for UI benefits, with some of them also considering additional legal standards as well. Instead of variations of the ABC test, 13 states look to different frameworks, such as the 20-factor economic realities test or the common law.

Broader Company Risks

Unemployment insurance claims are generally based on individual determinations, but they have the potential to signal to states a broader misclassification issue and trigger a tax audit of a company. Depending on the outcome, a state investigation could carry a hefty price tag. Last fall, Uber Technologies Inc. was hit with a $650 million bill for unpaid UI and disability tax in an ongoing dispute with New Jersey over worker classification.

The extent to which a company will fight individual unemployment insurance claims varies depending on several factors, including how much it relies on independent contractors, said Cheryl Sabnis, an attorney at King & Spalding who represents companies.

But the Covid-19 pandemic is upending the normal course of business and creating deep uncertainty, Sabnis said. It’s unclear whether UI systems will deal with the misclassification issue amid the massive surge of claims by taking a broader view of benefit eligibility or a narrower one, she said.

Responding to Covid-19 Emergency

Help for potentially misclassified workers seeking unemployment insurance benefits in the current emergency could come from the private and public sectors.

“Many lawyers and law students are looking for opportunities to make a difference during this crisis; representing misclassified workers in unemployment insurance cases is a very concrete way to help,” Terri Gerstein, director of the State and Local Enforcement Project at Harvard University’s Labor and Worklife Program, said via email.

States should set up an expedited process for handling cases involving potential misclassification, said Gerstein, a former chief of the Labor Bureau at the New York State Attorney General’s Office. States should also make clear that their agencies—not employers—decide who’s eligible for unemployment insurance, she said.

At the federal level, misclassified workers could get temporary financial help from Disaster Unemployment Assistance, said Stephen Woodbury, an economics professor at Michigan State University who’s written extensively on unemployment insurance.

That program provides benefits to workers who lost their jobs as a result of a presidentially declared “major disaster” and aren’t eligible for regular unemployment compensation.